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How to get the maximum variable rate on your savings account

Are you earning the maximum variable rate of interest on your savings account?

The interest rate that applies to your savings account is crucial to calculating how much your balance will grow. It’s important that you earn the maximum variable rate of interest to build on your savings as quickly as possible, but sometimes you might find that the maximum variable rate quoted for your account doesn’t match the interest returns you receive.

Let’s take a look at why this situation occurs and how you can prevent it.

Earn up to 2.87% p.a. by linking your USaver account to a UBank Ultra transaction account and transferring at least $200 per month into either account. This offer is available on balances up to $200,000.

Receive a maximum variable rate of 3.10% p.a. for 4 months, reverting to an ongoing rate of 1.20% p.a. for each month you don't make any withdrawals from the account. Available on balances below $1,000,000.

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What is the maximum variable rate on a savings account?

If you open a high-interest savings account, the money you deposit will earn interest at a variable rate. This rate is regularly adjusted by your bank in line with fluctuations to the Reserve Bank of Australia’s official cash rate, so the maximum variable rate of interest you can earn will go up and down over time. This is different to term deposits, which offer a fixed rate of interest for a set time period.

Why does the interest earned not match the maximum variable rate?

In some cases you may find that the interest earned on your account does not match the maximum variable rate quoted. There are several reasons why this can occur, including:

Bonus interest rates

Some savings accounts, often referred to as bonus saver accounts or reward saver accounts, offer two interest rates. First, there’s the standard variable rate that applies to the balance in your account at all times.

Second, the account will also pay a bonus interest rate on top of the standard rate, with the two separate interest rates combining together to create the maximum variable rate. However, in order to earn bonus interest, you will need to satisfy specific terms and conditions, such as depositing a certain amount each month or only making a limited number of withdrawals.

If you fail to satisfy these terms in any given month, the bonus interest rate will not apply and you will only earn the standard variable rate. One example of this type of account is the ING Savings Maximiser, which offers a maximum rate of 2.80% (standard variable rate of 1.00% p.a. + bonus interest rate of 1.80% p.a.) when you link with an Orange Everyday Account and deposit at least $1,000 per month.

Simple interest vs compound interest

Another important factor that affects the interest you can earn on your savings balance is whether your account pays simple interest or compound interest. Simple interest is only paid on the money you deposit into your account, but compound interest allows you to earn interest on the initial deposit and the interest payments you receive – in other words, you can earn interest on your interest.

How often interest is compounded

It’s also worth considering how often the interest on your account is compounded. This could happen daily, monthly, quarterly, half-yearly or annually, and the frequency with which it occurs can make a surprising difference to your balance. The more often interest is compounded, the more chance you have to earn interest on your interest, with the result being a higher-end balance.

Tiered interest rates

An interest rate may apply to balances below $10,000 while a different rate may apply to savings balances that exceed $10,000. With multiple interest rates potentially applying to your account, the maximum variable rate available will fluctuate in line with your bank balance.

Interest rate changes

Finally, one other risk to be aware of is that your bank may have changed the interest rate that applies without you knowing. Although banks have a requirement to advertise interest rate changes in national media when they occur, these announcements could easily slip by without you noticing. The new interest rate will then be reflected in your account statement – so depending on how often you receive statements and how closely you read them, it could be some time before you realise the maximum variable rate on your account has changed.

Case studies

To help explain the principles behind some of the reasons why the interest earned from a savings account may differ from the maximum variable rate, let’s take a look at a couple of case studies.

Case study 1: How often interest is compounded

Adam is in his early 20s and wants to start saving a deposit for a house. He has an initial investment of $5,000 and plans to deposit $500 each month for the next five years. Assuming an interest rate of 5% p.a., let’s look at how Adam’s balance differs based on whether interest is compounded daily, monthly or annually.

Account A

Account B

Account C

Interest compounded

Daily

Monthly

Annually

Initial deposit

$5,000

$5,000

$5,000

Ongoing monthly deposit

$500

$500

$500

Investment term

5 years

5 years

5 years

Interest rate

5% p.a.

5% p.a.

5% p.a.

Total balance

$39,931.81

$39,919.83

$39,788.28

As you can see, Adam can earn more interest by choosing an account that compounds interest daily. In fact, he ends up with an extra $143.53 compared to an account that compounds interest annually.

Case study 2: Bonus interest rates

Karen opens a bonus saver account that pays a maximum variable rate of 3% p.a. However, 1.50% of that maximum rate is made up of the standard variable rate, and the other 1.50% is made up of a bonus interest rate that only applies when Karen deposits at least $1,000 a month and doesn’t make any withdrawals.

For the purposes of this case study, let’s take a look at the difference in the amount of interest Karen earned in the following situations:

Situation A: Meets all the terms and conditions and earns the maximum variable rate of 3% p.a. for a full 12 months.

Situation B: Only earns the maximum variable rate for the first 6 months, but then forgets to meet the account terms and conditions for the remaining six months and therefore doesn’t earn any bonus interest.

Situation A

Situation B

Initial balance

$10,000

$10,000

Monthly deposit

$1,000

$1,000

Interest rate

3% p.a.

3% p.a. For first 6 months, 1.50% p.a. for second 6 months

Total balance

$21,470.54

$20,321.62

As the table shows, Karen’s failure to meet the bonus interest terms and conditions means that she earns $1,148.92 less in interest than if she had been paid interest at the maximum variable rate.

How to earn the maximum variable rate

Taking the above examples into account, there are a few simple steps you can take to ensure that you always earn the maximum variable rate:

Shop around. Before choosing an account, compare savings accounts to find one that offers a high maximum variable rate. Also remember to investigate account fees, features and accessibility before you make your decision.

Review your account regularly. The savings account sector is quite a competitive area of the baking industry, with new accounts and better interest rates becoming available all the time. With this in mind, it pays to review your savings account once a year and check whether you could get a better deal elsewhere.

Check your statements. Are you worried that your bank may have adjusted the interest rate on your account without you realising? Check your most recent statement to make sure you are earning a competitive rate.

Choose compound over simple interest. While simple interest accounts only allow you to earn interest on your initial deposit, compound interest accounts also allow you to earn interest on your interest.

Check how often interest is compounded. The more often interest is compounded, the more your balance will grow. An account that compounds interest daily or monthly will earn more than an account that compounds annually.

Satisfy the terms and conditions. If your account pays bonus interest, make sure you always satisfy the criteria necessary to earn the maximum variable rate.

Tim Falk is a writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.

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